How Federalism Could Spur Bipartisan Action On The Uninsured

About the Authors

National
efforts to greatly reduce the number of uninsured Americans have
made little progress for decades because achieving majority support
for any one approach has proved to be impossible. While as authors
we remain unreconciled on the best solution, we share the belief
that federally supported state experimentation is a promising way
to make progress. States should be allowed to try widely differing
solutions with federal financial support under legislated
guidelines, including specific protections and measurable goals.
Congress would enact a "policy toolbox" of federal initiatives that
states could include, and funding to states would be linked to
success in reaching the goals.

Nearly everyone thinks that something should be done to
reduce the number of Americans lacking health insurance.
Unfortunately, while numerous plans exist on how to reach that
goal, few agree on any one. Indeed, as authors we disagree on how
best to extend and assure health insurance coverage. Nonetheless,
we believe that using the pluralism and creative power of
federalism is the best way to break the political logjam and to
discover the best way to expand coverage.

Accordingly, we believe that states should be strongly encouraged
to try any of a wide range of approaches to increasing health
insurance coverage and rewarded for their success. This approach
offers both a way to improve knowledge about how to reform health
care and a practical way to initiate a process of reform. Such a
pluralist approach respects the real, abiding differences in
politics, preferences, traditions, and institutions across the
nation. It also implies a willingness to accept differences over an
extended period in order to make progress. And it recognizes that
permitting wide diversity can foster consensus by revealing the
strengths and exposing the weaknesses of rival approaches.

Despite our abiding disagreements on which substantive approach to
extending coverage is best, we believe that people of goodwill must
be prepared to countenance the testing of ideas they oppose if
progress is to be made. Moreover, we believe that there is no hope
for legislation to begin to transform the largest U.S.
industry-health care-unless such legislation enjoys strong support
from both major political parties.

Using Federalism To Spur Action

Proposals to reduce the number of uninsured Americans abound. Some
favor expanding government programs, such as Medicaid. Others favor
refundable tax credits to help families buy private health
insurance. Still others favor regulatory approaches, such as
changes in insurance rules. But working together in health care to
achieve a goal shared by virtually everyone has proved to be
impossible. One reason for this is that the capacity to reach
substantive compromise in Washington has seriously eroded.1 Among the causes is the widespread view that
reforming the complex health care system requires very carefully
designed and internally consistent actions. Some say that it is
like building a new airplane: Unless all the key parts are there
and fit together perfectly, the airplane will not fly. Thus, many
proponents of particular approaches fear that abandoning key
components of their proposals to achieve a compromise will prevent
a fair test of their favored approach and lead to failure. Another
obstacle is that many lawmakers believe that approaches that might
conceivably work in one part of the country, given the cultural,
philosophical, or health industry conditions prevailing there, will
not work in their state or district because of different local
conditions. This view leads many in Congress to resist proposals
that might work in some areas because they believe that those
proposals could make things worse for their constituents.

These and other factors have stalled efforts to extend health
insurance and achieve other reforms for decades. The enactment of
Medicare and Medicaid stands as one notable-and
instructive-exception to that pattern. Medicare sprang from
comprehensive social insurance initiatives of congressional
Democrats, Medicaid from limited needs-based approaches of
congressional Republicans. The passage of each program was possible
only because the two initiatives were linked in the form of a
trade-off, not so much by blending some elements of each approach
but by moving forward with two programs in parallel: Medicare for
the elderly and disabled, and Medicaid for the poor of all ages.
That experience illustrates a principle of politics: that progress
often requires combining elements of competing proposals into a
hybrid legislative initiative, in which internally consistent
approaches operate in parallel.

In our view, federalism offers a promising approach to the
challenge of building support to tackle the problem of uninsurance.
While proponents of nationwide measures to introduce health
insurance tax credits, or to extend Medicare or the State
Children's Health Insurance Program (SCHIP) to other groups, should
of course continue to make their case for national policies, we
emphasize an initiative designed to support states in launching a
variety of localized initiatives. Under this process, the federal
government would reward states that agreed to test comprehensive
and internally consistent strategies that succeeded in extending
coverage within their borders. In contrast to block grants,
federal-state covenants would operate within congressionally
specified policy constraints designed to achieve national goals for
extending health insurance. These covenants would include plans
ranging from heavy government regulation to almost none, as long as
the plans were consistent with the broad goals and included
specified protections. States could also select items from a
federally designed "policy toolbox" to include in their proposals.
Allowable state plans would include forms of single-payer plans,
employer mandates, mandatory individual purchase of privately
offered insurance, tax credits, and creative new approaches. States
would be free not to undertake such experiments and continue with
the current array of programs, but sizable financial incentives
would be offered to those that chose to experiment and financial
rewards given to those that achieve agreed-upon goals.

The model we propose builds upon proposals we have outlined
elsewhere.2 It is also compatible with
some other federalism approaches, such as the plan advanced by the
Institute of Medicine.3 We favor a wide
diversity of federal-state initiatives for three reasons. First,
fostering a bold program in a state will produce much information
that will aid the policy discovery process. Successes will
encourage others to follow, while unanticipated problems will force
redesign or abandonment and will be geographically contained.
Second, encouraging bold state action will quickly and directly
extend coverage to many of the uninsured. Instead of facing
continued national inaction or the potential for disruption of
state initiatives by future federal action, states would have the
incentive and freedom to act decisively. Third, we see no evidence
of an emerging consensus on how to deal with these problems at the
national level. But our proposal is based on the observation that
advocates of rival plans trust their preferred approaches enough to
believe that a real-life version would persuade opponents and
create a consensus. Not all can be right, of course, but all
advocates of health insurance reform, like residents of Lake
Wobegon, seem to believe that their plans are above average. Thus,
they should be open to the idea of testing diverse proposals. Our
proposal is a process to enable policymakers to discover which is
right, either for the whole country or for a region.

Core Elements

We propose that Congress provide financial assistance and a legal
framework to trigger a diverse set of federal-state initiatives. To
help break the impasse in Congress over most national approaches,
we propose steps designed to enable "first choice" political ideas
to be tried in limited areas, with the support of states and
through the enactment of a federal "policy toolbox" of legislated
approaches that would be available to states but not imposed on
them. Our view is that elected officials would be prepared to
authorize some approaches now bottled up in Congress if they knew
that the approach would not be imposed on their states. Our
proposed strategy would contain six key elements.

Goals and protections. First, Congress would set certain
goals and general protections. Goals would be established for
extending coverage, and perhaps improving the coverage of some of
those with inadequate coverage today. One such goal could be a
percentage reduction in the number of uninsured people in a state.
The more precise the goals, the more contentious they are likely to
be. But clear and measurable goals under the proposed covenants are
necessary if the system of financial rewards described below is to
work effectively.

What is "insurance"? For a coverage goal to mean anything,
it would have to define what constitutes "insurance." Specifying
adequate coverage in health care is no easier than quantifying an
adequate high school education, and when money follows success,
drafting such definitions becomes even more difficult.

In defining what is meant by adequate insurance, agreement
on two characteristics is vital: the services to be covered and the
maximum residual costs (deductibles and copayments) that the
insured must bear. States could be more generous than these
standards. Instead of speciying precisely what states must do in
each of these dimensions, we suggest that Congress establish a
required actuarial minimum-such as the cost of providing the
benefit package of the Federal Employees Health Benefits Program
(FEHBP) for the state's population-as the standard, with states
retaining considerable latitude on which services to include and
how much cost sharing to require. Whether to set this actuarial
standard high or low will be controversial and will determine the
overall cost to the federal government of eliciting state
participation.

Both high and low benefit standards suffer from well-known
problems. High standards would raise program costs and weaken
individuals' incentives to be prudent purchasers of health care.
Low standards expose patients to sizable financial risk and raise
questions about whether to restrict patients' right to buy
supplemental coverage. Thus, federal legislation would not specify
the content of insurance plans beyond some such actuarial amount.
States would then be free to design plans as they wish, although
certain types of plans might be presumptively acceptable (see
below), and others could be negotiated as part of a covenant. The
exact mix of benefits could vary within reason, but no further
limits would be imposed. One goal of this approach, after all, is
to encourage experimentation to generate information on whether
particular configurations of benefits work better than others. It
might turn out, for example, that states would adopt quite
different plans with similar actuarial values. One group might opt
for high-deductible plans covering a wide range of services with no
cost sharing above the deductible and generous relief from the
deductible for the poor, while others might adopt a system with low
deductibles and modest cost sharing but covering a much narrower
range of benefits. Discovering how individuals' and providers'
attitudes and behavior differ under such plans and how health
outcomes vary would provide valuable information for private health
insurance planners and government officials.

Protections for individuals. In addition to the definitional
question, the question also arises, What limitations and
protections should be applied to state experiments? If a simple net
reduction in uninsurance guaranteed a financial reward to a state,
for example, the state would have the incentive to drop coverage of
costly high-risk adults and extend coverage to less costly
(healthier and younger) workers. Some such concerns could be
addressed in negotiating covenants, but some broad protections and
policy "corridors" would be established under our proposal and
would be necessary to achieve political support.
One of the most politically sensitive would be a primum non
nocere limitation. That is, states could not introduce a plan
that reduced coverage for currently insured populations, most
notably the Medicaid population, beyond some minimum amount. We
believe that no reform proposal is likely to be achievable without
that restriction. Most Medicaid outlays in many states are not
strictly mandated by federal law, in the sense that some
beneficiaries and some services for all beneficiaries are optional.
States provide optional coverage because federal law permits it,
and the federal match makes its provision attractive to states. If
incentives were introduced to cover the non-Medicaid population,
states might find it financially and politically attractive to
increase the total number of insured people by curtailing Medicaid
eligibility and benefits and using the money saved, together with
federal support, to cover a larger number of people who are
uninsured but less poor.

Designing and enforcing rules to prohibit or limit such "insurance
swapping" would be extremely challenging but politically-and, one
could argue, morally-essential. On the other hand, we believe that
states should have some opportunity to propose different ways of
delivering the Medicaid commitment to the currently insured
population, as long as the degree and quality of coverage were not
diminished. That form of Medicaid protection could stimulate
creativity and improvement in coverage for the poorest citizens
while avoiding any threat to their existing coverage. To be sure,
there are disagreements, including between us, on the degree of
freedom states should have in deciding how to deliver the Medicaid
commitment. Positions range from only minor tweaking to sweeping
changes in the delivery system, such as allowing states to use
Medicaid money to subsidize individual enrollment in an equivalent
private plan. The degree of flexibility states should have, while
maintaining eligibility and level of coverage, is a difficult
political issue for Congress to decide.

Acceptable state proposals would also have to limit cost sharing
and features analogous to pension nondiscrimination rules. We
believe that requirements, consistent with the general goals and
protections we propose, are needed to ensure that lower-income
households do not face unaffordable coverage. Without such limits,
states could reduce the number of uninsured people and secure
attendant federal financial support, for example, by instituting an
individual mandate with a high premium that would effectively make
insurance universal among the financially secure and do little for
the poor. States would need to propose a fair, plausible way of
meeting the requirement, such as by mandating some form of
community rating or through a cross-subsidy to more vulnerable
populations.

The federal government should establish broad guidelines, but no
more. A key principle of our proposal is that state officials are
more likely than federal officials to design successful solutions
to those problems that members of the policy or congressional staff
community have failed to solve. Congress can and should set the
parameters, but it should avoid micromanagement.

"Policy toolbox" of federal policies and programs. A feature
of the congressional impasse noted earlier is that many plausible
health initiatives that might merit testing, and have support in
some states, are blocked by other lawmakers who oppose the
introduction of the approach in their own state or across the
country. Thus, we propose that Congress enact presumptively
legitimate approaches to the expansion of health insurance coverage
as a "policy toolbox" that would be available to states à la
carte to apply within their borders. Lawmakers could safely vote to
permit an initiative, confident that it would not be imposed on
their states. In this way, potentially useful policies and programs
could be "unlocked" from Congress and become available for states
to use in their own initiatives.

A policy toolbox likely would include expansions of existing
policies, such as raising income limits under Medicaid or lowering
the age of Medicare eligibility. It could include arrangements to
subsidize individual buy-ins to the FEHBP, refundable tax credits
or their equivalent (perhaps with some steps to modify the federal
income tax exclusion for employer-sponsored health insurance
costs), mandating employer or individual coverage, or creating a
single state insurance plan though which everyone may buy
subsidized coverage.

Other possible examples might include the following: (1) Remove
regulatory and tax obstacles to churches, unions, and other
organizations providing group health insurance plans. This could
open up new forms of group coverage offered though organizations
with an established membership and common values. (2) Allow
Medicaid and SCHIP to cover additional populations, with greatly
enhanced federal matching payments, and perhaps to operate in very
different ways-with appropriate safeguards to protect those who are
covered under current law. Both federal welfare legislation and
SCHIP, for example, included safeguards to preserve existing
Medicaid coverage. (3) Extend limited federal Employee Retirement
Income Security Act (ERISA) protection to large corporate health
plans willing to enroll nonemployees, and extend the tax exclusion
to those enrollees. This could lead in a state to expanded access
to comprehensive coverage. (4) Provide a voucher to individuals
designed to mimic a comprehensive refundable tax credit for health
insurance. This could allow the practical issues of a major tax
credit approach to be examined. (5) Enact legislation to make forms
of FEHBP-style coverage available to broader populations within
states. This would enable states and federal government to explore
the issues associated with extending the program to nonfederal
employees and retirees. (6) Enable states to establish association
plans and other innovative health organizations.

We emphasize that any menu of tools would be optional for states.
None would be required. Members of Congress would be more likely to
agree to the inclusion of elements they would deplore in their own
states if they knew that no state, including their own, would be
forced to adopt them than they would be in a nationally uniform
system. Some lawmakers, for instance, oppose association plans
because they believe that such plans would disrupt successful state
insurance arrangements. Under the menu approach, association plans
would be introduced only in states wishing to use them as part of
their overall strategy.

State proposals, federal approval. Under our proposed
strategy, states interested in a bold, creative initiative would
design a proposal consistent with the goals and restrictions
established by Congress. Typically this proposal would include some
elements from the federal policy toolbox in conjunction with state
initiatives.

Needless to say, a critical congressional decision would concern
mechanisms for approving state plans and monitoring state
performance. States would no doubt seek to take advantage of every
financial opportunity to game the system and to stretch agreements
to the limit, as the almost zany history of the Medicaid upper
payment level (UPL) controversy makes painfully clear. Yet
monitoring state behavior, determining state violations, and
enforcing penalties on states is enormously difficult. Moreover,
the entity could (and we think should) have the power to negotiate
parts of a proposal, not merely approve or reject it, so that
refinements could be made consistent with Congress's
objectives.

But what entity should this be? It might seem natural to designate
an executive agency that reports to the president, such as the
Department of Health and Human Services (HHS). We suspect, however,
that many members of Congress would refuse to cede so much
selection authority to another branch of government and that
roughly half would fear partisan decisions by an administration of
the "other" party. Congress would likely insist on adding
suffocating selection criteria and other restrictions to
executive-department decisions, jeopardizing the very creativity we
intend. Thus, we favor instead an existing or newly created body
that has independence but ultimately answers to Congress. A new
bipartisan body might perform this function with members selected
by Congress and the administration or with members also
representing the states, with technical advice from the U.S.
General Accounting Office (GAO). This body would evaluate and
negotiate draft state proposals according to the general
requirements specified by Congress and then present a recommended
"slate" of proposals to Congress for an up-or-down vote without
amendment. Once the state proposals had been selected, HHS would be
responsible for implementing the program.

Bipartisan willingness to authorize state programs and to
appropriate sufficient funds to elicit state participation also
requires that members of Congress believe that approaches they find
congenial will receive a fair trial and agree that approaches they
reject will also receive a fair trial. Unfortunately, current
federal legislation makes two key approaches difficult to implement
in individual states or even groups of states: a single-payer plan
and an individual mandate combined with refundable tax credits. A
federalist approach should include mechanisms that would enable
states to give such proposals as fair and complete a test as
possible, both because that would provide valuable information and
because the political support of their advocates is important in
Congress.

Crafting a single-payer experiment. ERISA, which exempts
self-insured plans from state regulation, is the primary technical
obstacle to testing single-payer plans. The political sensitivity
to modifications in ERISA is difficult to exaggerate. Any attempt
to carve out an exception from ERISA for state programs to extend
coverage would probably doom federal legislation. But states could
create "wraparound" plans to cover all who are not currently
insured, or even to cover all who are not insured under plans
exempted by ERISA from state regulation. While such an arrangement
would not be a single-payer plan, it could achieve universal
coverage, which is one defining characteristic of single-payer
plans, and arguably be sufficient for a valid test. After all, the
U.S. health care system is characterized by different subsystems
for certain populations and has a form of single-payer coverage for
military veterans. But of course the real test is whether advocates
of single-payer plans regard such a limited arrangement as a fair
trial.

An individual tax credit approach. The obstacles to a
state-level individual mandate with a refundable credit are also
serious and complicated. We presume that an individual mandate
would require some contribution from people with incomes above
defined levels. Such a mandate raises both political and practical
questions. Testing federal tax reform in selected geographic areas
also raises constitutional and practical issues, although advocates
of the approach maintain that other site-specific programs
involving federal tax changes, such as enterprise zones, have
passed muster. In addition, for a limited experiment it might be
possible to design subsidy programs that would mimic tax
relief.

Administering a refundable tax credit would pose formidable
difficulties for some states, particularly those that do not have a
personal income tax. In all states, the logistics of providing a
credit with reasonable accuracy on a timely basis would be
challenging. So, too, would deciding how to address such
administrative problems as households that live in one state yet
work in another. Advocates for tax credits say they have solutions
to these and similar challenges, just as supporters of single-payer
approaches or employer mandates claim to have answers to challenges
facing those approaches. For instance, some maintain that the
employment-based tax withholding system could serve as a vehicle
for refundable credits or equivalent subsidies and would make
individual enrollment practical.4
Whether or not they are right is of course disputed by their
critics. The beauty of a "put up or shut up" federalism initiative
is that it offers a chance for advocates to offer such solutions in
practice instead of in theory.

Using "managed federalism" to build support? Deciding how
many states could qualify for experiments is an open political and
technical question. One approach would be to limit it to a few
states. This would limit costs but has little else to be said for
it. Accordingly, we would favor opening the program to all states
wishing to accept a federal offer. Nevertheless, we recognize that
some lawmakers would be reluctant to vote for a process of
federal-state innovation unless they were sure that certain
"generic" or "standard" approaches were included-especially if the
number of states in the program were to be limited. In particular,
we believe that our proposal can win congressional support only if
liberals and conservatives alike are fully convinced that the
approaches each holds dear will receive a fair and full trial in
practice.

While we believe that any state initiative that meets approval
should be welcomed, political considerations thus might require
that no state's proposal would be approved unless a sufficient
range of acceptable variants was proposed. For example, strong
advocates of market-based or single-payer approaches might find the
federalism option acceptable only if each was confident that
favored approaches would be tested

Adequate data collection. To determine whether a state was
actually making progress toward a goal, accurate and timely data
would be needed. These data would include surveys of insurance
coverage, with sufficient detail to provide state-level estimates.
Such surveys would be essential to show whether the states were
making progress in extending health insurance coverage. They are
vital to the success of the whole approach because payments to
states (apart from modest planning assistance) should be based on
actual progress in extending coverage, not on compliance with
procedural milestones.

Congress should also assure that states report on use of health
services, costs, health status, and any other information deemed
necessary to judge the relative success of various approaches to
extending coverage. Only a national effort could ensure that data
are comparable across states. States' cooperation with data
collection would be one element of the determination of whether a
state was in compliance with its covenant and was therefore
eligible for full incentive payments. The experience with state
waivers under welfare before enactment of the 1996 welfare reform
clearly illustrates the power and importance of such data
collection. The cumulative effect of the reports showing the
effectiveness of welfare-to-work requirements in reducing rolls,
increasing earnings, and raising recipients' satisfaction
transformed the political environment and made welfare reform
inescapable.

Rewarding progress. Congress would design a formula under
which states would be rewarded for their progress in meeting the
agreed federal-state goals of extending insurance coverage. As
experience with countless grant programs attests, haggling over
such formulas can become politics at its grubbiest, with elected
officials voting solely on the basis of what a particular formula
does for their districts. Even without political parochialism,
designing a formula that rewards progress fairly is no easy task.
For one thing, states will be starting from quite different places.
The proportion of states' uninsured populations under age
sixty-five during 1997-1999 ranged from 27.7 percent in New Mexico
and 26.8 percent in Texas to 9.6 percent in Rhode Island and 10.5
percent in Minnesota and Hawaii.5
Designing an incentive formula to reward progress amid such diverse
conditions is both an analytical and a political challenge.
Moreover, the per capita cost of health care varies across the
nation, which further complicates the assessment of progress. The
cost of extending coverage depends on the geographic location,
income, and health status of the uninsured population. Having
financial access may be hollow in communities where services are
physically unavailable or highly limited. Extending coverage may
require supply-side measures to supplement financial access.

We believe that the only way to design such a formula is to remove
the detailed design decisions from congressional micromanagement.
We suggest that Congress be asked to adopt the domestic equivalent
of "fast-track" trade negotiation rules or base-closing
legislation. Under this arrangement, Congress would designate a
body appointed in equal numbers by the two parties, to design an
incentive formula that Congress would agree to vote up or down,
without amendments. Such a formula would have to recognize the
different positions from which various states would start. Any
acceptable formula would have to reward both absolute and relative
reductions in the proportions of uninsured people. Whether
financial incentives would be offered for other dimensions of
performance and how performance would be measured constitute
additional important challenges.

Sources of funding. Bleak budget prospects could cause one
to give up on this or any other attempt to extend health insurance
coverage broadly. But as recent history amply illustrates, the
political and budgetary weather can change dramatically and with
little notice. What funding approach would be desirable if funds
were available? Under our proposal, the federal funding would be
intended for several broad purposes: (1) A large portion of the
money would be used to help states actually fund approaches to be
tested. (2) Some funding (perhaps with assistance from private
foundations) would provide national support and technical
assistance to states. A model to consider for such support is the
Health Resources and Services Administration (HRSA) State Planning
Grants program, which both funds state planning activities and
provides federal support and technical assistance. (3) Some funds
would cover the cost of independent performance monitoring. (4)
Some funds would be set aside to reward states for meeting the
goals in their agreed-upon plan. Congress might consider an
automatic "performance bonus" system similar to the mechanism used
in welfare reform. Congress could also consider withholding the
periodic release of part of a state's grant pending a periodic
assessment by the independent monitor of the degree to which the
state is accomplishing the objectives specified in its covenant.
Only those states willing to offer proposals designed to achieve
the national goals would be eligible for a share of the funding or
for the menu of federal policy tools. A state could decline to
offer a proposal and remain under current programs.

Federalism enables the states to undertake innovative approaches
to challenges facing the United States. Federal legislation often
grants states broad discretion in designing even those programs for
which the federal government bears much or most of the cost. In
health care as well as education or welfare, states have been the
primary innovators. But the federal government limits, shapes, and
facilitates such innovation through regulation, taxation, and
grants. Such a partnership is bound to be marked by conflict and
tension as state and federal interests diverge.

A creative federalism approach of the kind we propose would change
the dynamics of discovering better ways to expand insurance
coverage, just as a version of this approach triggered a radical
change in the way states addressed welfare dependency. By actually
testing competing approaches to reach common goals, rather than
endlessly debating them, the United States is far more likely to
find the solution to the perplexing and seemingly intractable
problem of uninsurance.

An earlier version of this paper was presented at a conference
convened by the Council on Health Care Economics and Policy, 19
September 2003, in Washington, D.C.

Henry Aaron (haaron@brookings.edu) is a
senior fellow in health economics at the Brookings Institution in
Washington, D.C. Stuart Butler (butlers@heritage.org) is
vice president for domestic and economic policy studies at the
Heritage Foundation, also in Washington.